Why a fiscal stimulus is needed
-- I sent this to the New York Times as an op-ed.
They haven't published it yet, and I wonder how long should I hold my breath.
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Robert Shiller published an essay in the NYTimes today, Nov. 26, 2011, on "The Fire Bell of Unemployment"
in which he states that, "First, there is a lack of scientific proof that government spending — fiscal stimulus — will do much to remedy unemployment."
I think it is critical to deal with that assertion to have any understanding of solutions at hand.
Between 1933 and 1937 the unemployment rate dropped from 25% to 9.6% due to "government spending --- fiscal stimulus". There was the Civilian Conservation Corp, the WPA, and the PWA. Roosevelt won a landslide re-election because of his success.
I suppose that is as close to "scientific proof" as an economic answer can be. Human sciences are in fact mostly studies, not sciences, and establishing causation is literally impossible. I refer you to the essay by Marshall Auerback at New Deal 2.0, August 30, 2010, "The Real Lesson from the Great Depression: Fiscal Policy Works" where he cites the drop from 25% to 9.6%.
If that were not enough evidence we can look at the period 1939 through 1944 when "government spending --- fiscal stimulus" lowered unemployment from around 14% to 1.2% in 1944. "The total output of the economy in constant prices -- the real Gross National Product (GNP) -- increased from $319.8 billion (in 1972 dollars) in 1939, the last year unaffected by the war or the prospect of war, to a peak of $561.9 billion (in 1972 dollars) in 1944." This is an increase in GNP of 76% in 6 years which is a growth rate of 10% per annum compounded. These figures originate from the book American Economic Development Since 1945 by Samuel Rosenberg, page 20. Furthermore, "Between 1939 and 1944, total civilian employment rose from 45.8 million to 54.0 million." Combining employment in the military services, the civilian employment increased by an unheard of 42% over six years. Over half that increase were women entering into the paid work force. Clearly, "government spending -- fiscal stimulus" made an enormous difference, perhaps it made all the difference.
Mr. Shiller cites a proposal from Edmund Phelps to "provide a subsidy of $4.50 an hour for the lowest-paid workers, with declining amounts until they earn more than $15 an hour." This is good, but I prefer a more generous proposal that comes from the University of Massachusetts/Amherst professors Jeannette Wicks-Lim and Jeffrey Thompson, "Combining Minimum Wage and Earned Income Tax Credit Policies to Guarantee a Decent Standard to All U.S. Workers". To quote from the report: "Specifically, we begin by
proposing a 70 percent increase in current minimum wage rates. This would raise the federal minimum from today’s rate of $7.25
to $12.30 per hour. We also propose two expansions of the EITC [Earned income Tax Credit], the federal program that provides
tax relief and cash benefits for low-income working families. These include raising the maximum EITC benefits by 80 percent and
the income eligibility threshold to three times the federal poverty line. The maximum EITC benefit would rise from $5,028 to
$9,040 and households with incomes up to $57,000 could receive benefits.”
The Tax Policy Center shows that 28.2% of all U.S. personal income is the portion received by the lower-earning 80% of households deriving from wages and salaries. Approximately 80% of the nation's workers are non-supervisory workers (or employees). In other words, the main income of 80% of the work force is wage and salary income and their share is 28.2% of all income. To re-enforce this idea, note that the Social Security Administration released figures for wage and salary income for 2010, and they showed that the median income was $26,362 for the 150 million workers who had payroll income. About 1 in 6 workers, or approximately 25 million workers, received 0 to $5,000 a year, another 1 in 6 received between $5,000 and $15,000 a year, and another 1 in 6 workers received income of between $15,000 and $26,362. The average contribution to economic output is $109,000 per worker per year according to the San Francisco Federal Reserve Bank, and our GDP per capita is almost $46,000 per year. The lower-earning 80% receive only 40% of all the personal income our economy generates, while the top 20% of households receives 60.3%, according to the Tax Policy Center. Clearly there is room for raising the incomes of lower paid employees, as a measure of economic justice. And in doing so we would stimulate the economy and create employment.
Occasionally left-wing economists state, counter-intuitively, that the government has to spend in order to reduce the deficit. Since the economy has a shortage of purchasing demand, or aggregate demand, only a fiscal stimulus targeted at low-income households will revive purchasing demand, which amounts to about 70% of the economic activity. But, in contrast to the deficits-must-increase argument, there are potentially $824 billion in annual cuts we could make and not spend-up the deficit, according to the Institute for Policy Studies report released this month, "We Are Not Broke". Their $824 billion annual spending cut is 7 times greater than the amount the Super Committee was charged with finding. Freeing up $824 billion annually and applying it to underpaid workers would generate the missing purchasing demand that causes our economy's present lackluster performance.
We do not have a spending problem or a taxing problem, our problem is distribution of income and wealth. We have the most unequal distribution of annual income among developed nations. The highest one percent of households in the wealth scale own more than 225 times the median household net worth, an all time high. The one percent also received 64% of the economic gains 2001 to 2007, and over 50% of the nation's gains over the past 30 years, according to U. C. Berkeley professor Emmanuel Saez. The marginal income tax rate on the very top incomes over $379,000 a year is nominally 35%, but as a group they pay 30.8% in overall and effective taxes (overall means to all government agencies, and effective means as a portion of their income.) See the report by Citizens for Tax Justice for confirmation, "All Americans Pay Taxes". The average overall effective rate for the lower 99% averages to 28.2%. Households with incomes around $40,000 pay 25.3% per year.
In the coming year we will all be playing the amateur economist. I want the NYTimes to present divergent views.
I recommend the University of Mass/Amherst professors who run PERI, James Boyce, Robert Pollin, Thomas Palley, and others.
I don't have any credentials at all. I don't expect publication. But I have convinced myself, if no one else, that economists are a sad lot, and quite often have less understanding than the average Joe. See my blog, http://benL8.blogspot.com where I present a
plethora, a raft, a compendium of data on inequality. --- I can provide reference citations for the figures in this short essay.
Thanks, Ben Leet